While the jump in corporate sales is primarily due to macroeconomic factors (i.e., a significant drop in the stock market since 2000 and a struggling economy), each sale is unique. Below are a few details on some of the more publicized secondary transactions by corporations.
Electronic Data Systems – When Electronic Data Systems launched a $1.5 billion investment program in December 1999, it was to be one of the largest corporate venture programs of all time. Not only was Ross Perot’s Plano, Texas-based IT company going to take equity positions in its Internet-based clients, it was going to invest in all sorts of Internet and business-to-business startups.
“EDS is doing more than just investing in B2B dot-com companies-EDS is investing in its future and in management of supply chains of major global corporations,” chairman and chief executive Dick Brown said at the time.
Despite EDS investing $230 million in 16 startups, four years later that plan had failed. EDS suffered its share of dot-com blowups, but its bigger problem was timing, having entered the market just months before the tech bubble started to burst. The 16 companies held by EDS Ventures were gobbled up by a syndicate led by San Francisco’s Thomas Weisel Partners in April for an undisclosed sum.
MCI (WorldCom Ventures) – When it filed for Chapter 11 protection last July, MCI, the re-named remaining piece of telecommunications carrier WorldCom of Ashburn, Va., said it would hold onto its $250 million venture capital portfolio, but make no new investments. WorldCom Ventures was a late-stage player capitalized through the company’s treasury that focused exclusively on telecommunications start-ups, with investments totaling between $10 million and $20 million. Founded in 1998, the group began to partner with some of the venture industry’s biggest early-stage names by mid-1999. It did at least 10 deals with New Enterprise Associates. As the U.S. Justice Department discovered more and more evidence of corruption at WorldCom, the company hastily put its entire investment portfolio up for sale. Once the portfolio was sold, Susan Mayer, MCI’s senior vice president and treasurer, and the officer in charge of WorldCom Ventures, offered her resignation June 10.
WorldCom used the secondaries market to monetize its remaining assets to raise money for creditor. Others, however, avoid ridding themselves of an entire venture portfolio and pick and choose between its portfolio companies to sort the winners from the losers. A company may be motivated to prune rather than chop its entire portfolio in order to save its reputation in the marketplace. Or, it may have an ongoing product development or market relationship with one of its portfolio companies that would be best preserved with an equity stake in that company.
Lucent Technologies In January 2002, the Murray Hill, N.J.-based company and London-based secondaries shop Coller Capital created a joint venture to manage Lucent’s portfolio of 27 companies. It was a complicated transaction, but essentially, Lucent sold 80% of its portfolio to Coller. Although Lucent had paid more than $283 million for its stake in those companies, published reports indicate that Coller walked off with 80% ownership for only $100 million. While Lucent may still earn a return on any future sales of its venture portfolio, this structure allows it to back away from its investments without losing face. Lucent created a venture capital arm in order to commercialize technologies that were developed inside its research labs, but not core to the company’s strategy. With Coller Capital taking a majority stake in the portfolio, it isn’t likely that Lucent will pour any additional capital into the portfolio. At the same time, Lucent trimmed the staff of its venture group, further reducing the cost of maintaining the portfolio.
The deal has already paid huge dividends for Coller. Six months after acquiring Lucent’s portfolio, for example, Coller sold Celiant Corp. to Andrews Corp., a communications equipment maker based in Orland Park, Ill. for $470 million. In just one deal, Coller was able to recoup its investment.